Rise in euro money market rate expectations difficult to square

Since a rout took hold in eurozone bond markets, expectations of future money market rates have also moved higher, albeit of course in a much less dramatic fashion. Nevertheless, steepening of money market curves is difficult to square with the fundamental backdrop, especially when seen in conjunction with the ECB's forward guidance. 

From a liquidity point of view, it is even harder to explain, as excess liquidity only looks set to rise further. Therefore, the forward curve for money market rates is expected to re-flatten once the dust of the recent bond market rout has settled. We also take a closer look here at the ECB's TLTRO-4, for which banks were informed about their borrowing limits yesterday and banks are required to submit their bids by 17 June 9:30 CET at the latest (with allotment taking place the following day). 

In the previous TLTRO, banks took up a more-than-expected EUR97.8bn despite some banks still being significantly constrained at that time by their past lending stats. Rabobank argues, the 'need' for additional liquidity has only declined because of the ECB's outright purchase program. In that condition, a switch out of 3M LTRO into the TLTRO-4 should be the most important driver in this auction as there will be relatively little 'new' demand for liquidity, adds Rabobank. 

"On this basis, a take-up is likely that is considerably below the EUR98bn seen in March, with a (very unscientific) ballpark range being EUR 50 - 75bn. Nevertheless, even a number in line with that range should be seen as further 'cementing' the amount of excess liquidity. Ultimately, this should ensure low Eonia fixings going forward and thus support a correction in what we believe are overdone expectations about future short-term rates," says Rabobank.